10 Facts About VAT in the UAE

Value Added Tax (VAT) is all set to make its entry in the six-nation GCC block on the 1st of January, 2018. This article will help you understand about VAT and its implications.

VAT:

This would be a secondary source of raising revenues for governments in the Gulf Cooperation Council (GCC) and is expected that and additional revenue of Dh12 billion would be generated in the first year post implementation of VAT.

The move to implement VAT was devised post the sharp decline in oil prices and under the recommendation of IMF to have a fiscal consolidation in the GCC, the governments schemed out plans for diversification of and reduction of subsidies.

When does it come into effect?

Vat comes into effect at 5 percent on the 1st of January, 2018 in the GCC.

How does VAT work?

As a first phase, all companies that report revenues more than Dh3.75 million annually, would have to be registered under the GCC VAT system and those who report between Dh1.87 million to Dh3.75 million will have an option to register for VAT in this phase. The second phase however will make it mandatory for all companies to be registered under the system, regardless of the revenues declared. These phase wise schematic implementation have been confirmed by the Undersecretary of the UAE Ministry of Finance, Mr.Younis Al Khoury.

Will VAT be applicable to everything?

UAE has no income tax on salaries and will thereby remain tax-free in many ways even after VAT comes into effect. The country has free zones which offer tax free environment including 100 per cent foreign ownership in free zones.

The government plans to either zero-rate or exempt many supplies which are most likely to impact the common man, so that the impact of VAT is minimized. The usual plans when introducing a VAT by any government would be to focus more on taxing discretionary expenses made by consumers, while being cautious about the lower strata being unaffected.

What does not attract VAT?

The government has declared about a 100 food items, health, education, bicycles, and social services that would be exempted from VAT.

Where will VAT be applicable?

The tax category is defined for products in Electronics, smart phones, cars, jewellery, watches, eating out, and entertainment. It is also expected that excise duties will be applicable on certain beverages that are deemed to be harmful to health, including those with high sugar content.

Will VAT be a bane to business?

If your business is in the supply of goods or services that are subject to VAT (including at the zero rate) you can reclaim VAT which you incur on costs. When your business deals with activities that are exempt from VAT, you cannot reclaim VAT incurred on costs, and it is indeed a cost to your business.

Will VAT affect prices/margins?

As VAT is a tax levied on the price, it sure does affect with prices and margins. However, it would be under the sole discretion of the supplier to accommodate the fluctuations within or out of the costing.

How to plan?

As there is little or no time left to make changes, it is ideal that the impact be best understood and plan as to how to deal with it, depending upon the size and complexity of the business.

Why is the VAT now a move by the GCC?

With the sharp decline in oil revenues, the need for diversifying income sources and having a fiscal consolidation has resulted in the birth of VAT in the GCC.